When Secretary of Agriculture Mike Johanns outlined the USDA’s proposal for the 2007 Farm Bill, it contained a significant number of innovative programs that drew verbal applause, and one particular program that drew some contradicting responses: Huh? and Yeah! It might be easy to predict most of the folk who offered those responses, but it is almost impossible to undoubtedly determine who is going to line up on which side of the fence created by the proposal to have a farm’s adjusted gross income determine eligibility for collecting farm program payments.

Most observers of farm policy will correctly predict that farms with more than the $200,000 adjusted gross income, which would lose eligibility under the proposal, would oppose the idea. But when you look at individual farms across the country, it is difficult to say a particular farm will perennially be immune to the rule, or perennially lose eligibility for farm program payments. At least that is the outcome of a study by economists at Texas A & M University. The 2002 Farm Bill contains a similar means test, but the limits are much higher. It extends eligibility for farm programs payments up to a $2.5 million limit based on a three year moving average, and also excludes operations if less than 75% of the adjusted gross income originates from farming, ranching or forestry.

The 64 farms studied by the TAMU economists are a blend of US agriculture, but are all managed by full time operators who have no off-farm income, that might otherwise skew the analysis. The economists used the proposed $200,000 limit with the 75% qualification and the three year moving average. They predicted price and yield variability, based on historical data, and forecast gross income for the operations over the next 10 years, applying the $200,000 limitation in 2008 and beyond to determine which farms would be prohibited from collecting farm program payments. In general, the research indicated that due to the risky nature of net farm income, and subsequently adjusted gross income, some of the operations would be eligible for USDA programs in one year and not the next year.

Feed grain farm results:

• Acreage ranged from 900 to 7,500 in the 19 sample farms.
  
• The average of the 3-year average adjusted gross income was $160,000.
  
• The 3-year average AGI ranged from a $249,000 loss to $735,000.
  
• The 19 feed grain operations averaged 2.84 years of ineligibility, ranging from always eligible for a 900 acre operation to only .33 years of eligibility for a 7,500 acre farm.
  
• Farms with up to 1,400 acres had a zero probability of ineligibility, and the range extended to a 95% chance of ineligibility for the 7,500 acre farm.
  
• There was a 41% average probability of ineligibility for all of the 19 farms.
  
• Of the 19 farms, 16 had were likely to lose eligibility for farm program payments at some point, and the average loss was $78,000 per year, ranging from $0 to $198,000 loss in payments.
  
• As a result of the lost payments, the farm’s net worth declined, and the average loss of net worth was $102,000 per year, representing an average 1.81% decline in net worth.
  

The new parameters for the proposed means test impacted many farms of a lesser size according to the economists. Farms that were ineligible for payments at least one year in the simulation included: a 1350 acre farm in Iowa, 1850 & 2050 acre farms in Missouri, 2180 acre farm in North Dakota, 1960 acre farm in Nebraska, 1200 & 1200 acre farms in Texas, and a 1500 acre farm in South Carolina. Researchers said, “The impacts of farm program ineligibility were translated into lower net cash incomes and lower ending real net worth. Six of the 16 feed grain farms that lost government payments saw more than $150,000 decrease in real net worth and four lost more than 3% of real net worth.”

Feed grain operations were not the only type of farms affected by the rules change:

• Eight of the 10 representative wheat farms would experience losses in government payments due to the lower AGI limits for program eligibility.
  
• Sixteen of the 20 representative cotton farms experienced lower average annual government payments under the AGI scenario.
  

Summary:
Although creators of the proposed USDA budget were attempting to address controversial issues of farm program payments going to large operations, the outcome of the proposal has apparently had a significant impact on average sized operations common throughout the Cornbelt. The restriction of farm program payments to operations with less than a $200,000 adjusted gross income will impact most operations of 2,000 acres and more at least one year in the next seven, and the larger the operation the greater the chance for losing eligibility one or more years.